Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below: $$\begin{array} { l c c }
\text { Year } & \text { Investment A } & \text { Investment B } \
0 & \$ ( 15,000 ) & \$ ( 9,000 ) \
1 & 5,000 & 5,000 \
2 & 5,000 & 4,000 \
3 & 5,000 & 3,000 \
4 & 4,000 & 1,000
\end{array}$$ The company's hurdle rate is 12%.What is the present value index of Investment B? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your intermediate calculations.Round your answer to two decimal points.)

Question

Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below: $$\begin{array} { l c c } 
\text { Year } & \text { Investment A } & \text { Investment B } \
0 & \$ ( 15,000 ) & \$ ( 9,000 ) \
1 & 5,000 & 5,000 \
2 & 5,000 & 4,000 \
3 & 5,000 & 3,000 \
4 & 4,000 & 1,000
\end{array}$$ The company's hurdle rate is 12%.What is the present value index of Investment B? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your intermediate calculations.Round your answer to two decimal points.)

Quizplus · Accepted Answer

To calculate the present value index of Investment B, we need to first calculate the present value of the cash flows using a discount rate of 12%.  
PV of Investment B = $200,000/(1+0.12) + $50,000/(1+0.12)^2 + $100,000/(1+0.12)^3 = $296,945.91  
Present Value Index = PV of Investment B / Initial Investment = $296,945.91 / $250,000 = 1.19  
Therefore, Investment B has a present value index of 1.19, which is higher than 1.0, indicating that it is a good investment opportunity. Therefore, the best choice for the company is Investment B.

Shenandoah Springs Company Is Considering Two Investment Opportunities Whose Cash